2017 (8) TMI 1017 - AT - Insolvency and Bankruptcy

Appellants Qualify as Financial Creditors under Insolvency Law

Nikhil Mehta And Sons Versus AMR Infrastructure Ltd.

Nikhil Mehta And Sons Versus AMR Infrastructure Ltd. - Tmi Issues Involved:1. Whether the appellants qualify as 'Financial Creditors' under Section 5(7) of the Insolvency & Bankruptcy Code (I & B Code).2. Whether an application for triggering the insolvency process under Section 7 of the I & B Code is maintainable when winding-up petitions are pending before the High Court against the 'Corporate Debtor'.Detailed Analysis:1. Qualification as 'Financial Creditors':The appellants entered into agreements/Memoranda of Understanding (MOUs) with the respondent for the purchase of three units (a residential flat, shop, and office space) in projects developed by the respondent. Under these agreements, the appellants opted for a 'Committed Return Plan,' whereby they paid a substantial portion of the sale consideration upfront, and the respondent committed to paying them a fixed monthly amount as 'Committed Returns/Assured Returns' until the units were handed over.The appellants argued that this arrangement was a method for the respondent to mobilize funds at lower rates than available from financial institutions, making the appellants 'Financial Creditors' under Section 5(8)(f) of the I & B Code. They cited the SEBI order in the case of M/s. MVL Limited, which categorized similar transactions as 'Collective Investment Schemes.'The tribunal examined the definitions under Sections 5(7) and 5(8) of the I & B Code, noting that a 'financial debt' involves a debt disbursed against the consideration for the time value of money. The tribunal found that the appellants were 'investors' who had chosen the 'committed return plan,' and the respondent had agreed to pay monthly committed returns. This arrangement was considered a 'debt' under Section 3(11) of the I & B Code.The tribunal referred to the respondent's annual return, which showed the amounts owed to the appellants as 'commitment charges' under 'financial costs,' akin to interest on loans. Additionally, Form 16-A indicated TDS deductions on the committed returns, treated as 'interest other than interest on securities' under Section 194-A of the Income Tax Act.The tribunal concluded that the appellants' disbursements were against the consideration for the time value of money, qualifying as 'financial debt' under Section 5(8)(f). Therefore, the appellants met the criteria for being 'Financial Creditors' under Section 5(7).2. Maintainability of Application for Insolvency Process:The tribunal considered whether the application for triggering the insolvency process under Section 7 of the I & B Code was maintainable, given that winding-up petitions were pending before the High Court against the 'Corporate Debtor.'The tribunal noted that the insolvency process could be initiated by a 'Financial Creditor' when a default or debt has occurred. The tribunal found that the appellants had filed the application under Section 7 after the respondent defaulted on the committed returns. The tribunal emphasized that the I & B Code's provisions for insolvency resolution were distinct from the Companies Act's winding-up provisions.The tribunal ruled that the pending winding-up petitions did not preclude the appellants from seeking relief under the I & B Code. The tribunal set aside the adjudicating authority's order, which had dismissed the appellants' application on the grounds of pending winding-up petitions.Conclusion:The tribunal concluded that the appellants qualified as 'Financial Creditors' under the I & B Code and that their application for triggering the insolvency process was maintainable despite the pending winding-up petitions. The tribunal remitted the matter to the adjudicating authority to admit the application and pass appropriate orders, allowing the appellants time to complete the application if necessary. The appeal was allowed without any order as to costs.